{"id":37240,"date":"2013-04-02T02:07:19","date_gmt":"2013-04-02T06:07:19","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=37240"},"modified":"2013-04-02T02:07:19","modified_gmt":"2013-04-02T06:07:19","slug":"my-platinum-chat-with-rick-rule","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/04\/02\/my-platinum-chat-with-rick-rule\/","title":{"rendered":"My Platinum Chat With Rick Rule"},"content":{"rendered":"

By MoneyMorning.com.au<\/u><\/a> <\/p>\n

I was chatting with Rick Rule last Friday. Rick is now part of Sprott Asset Management, one of the most respected natural resource investors<\/strong> around. Rick also had a ridiculously good long-term track record in managing money before joining Sprott.<\/p>\n

Anyway, Rick has a new thesis he is hot on: platinum and palladium,<\/strong> or more broadly the platinum group metals (PGMs). I\u2019ve learned when Rick gets hot on an idea, it is worth listening to him. <\/p>\n

The thesis is simple, as most good ones tend to be…<\/p>\n

The Law of Supply and Demand <\/h2>\n<\/p>\n

\u2018What we discovered in about four weeks\u2019 work,\u2019<\/em> Rick told me, \u2018is that the platinum and palladium mining industry as a whole does not earn its cost of capital. What that means is that either the price of platinum and palladium go up or there is less and less of it going forward.\u2019 <\/em><\/p>\n

Another way to say it is that the platinum and palladium business<\/a>, as is, doesn\u2019t pay investors enough for the risks they take compared with alternatives. So it means people will not invest new dollars in the sector. <\/p>\n

No new investment in mining means depletion of existing mines with no new sources of supply. Eventually, the price has to go up as rising demand (or flat demand) presses on a diminished supply. <\/p>\n

What\u2019s unique here is that platinum and palladium<\/strong> face particularly challenging supply constraints<\/strong>. <\/p>\n

\u2018Gold and silver come from many countries and many geologies and as a byproduct with other metals,\u2019 Rick says by way of analogy. \u2018But about 90% of platinum and palladium supplies come from South Africa, Zimbabwe and Russia. And they are enormously constrained.\u2019 <\/em><\/p>\n

How constrained? Well, South Africa is by far the most important producer. Let\u2019s start there. <\/p>\n

\u2018First, it doesn\u2019t earn its cost of capital,\u2019 Rick says. \u2018And that has manifested itself in a few ways, but the most important is that the industry by its own estimate has deferred between $6\u20138 billion in capital investment.\u2019<\/em> <\/p>\n

No surprise, then, that production has fallen 19% in six years. \u2018We\u2019re not talking about a set of circumstances that is going to affect production at some future date. We\u2019re talking about a set of circumstances that is already driving higher production costs and lower production.\u2019 <\/em><\/p>\n

Rick took me through the situation in South Africa in some detail. The mining industry <\/strong>there is labour-intensive for reasons both historical and geological. Workers are poorly paid. Labour conditions are truly awful. \u2018Workers are crawling across broken rock on their hands and knees, often carrying 125\u2013150 pounds of hand-operated drills with them,\u2019 Rick says. \u2018Worker mortality was always disgusting in South Africa, but it\u2019s becoming frightful now.\u2019 <\/em><\/p>\n

Workers have almost certainly seen a co-worker killed, if not maimed. \u2018The point of all this,\u2019<\/em> Rule says, \u2018is that workers\u2019 wages have to go up. But because the industry can\u2019t earn its cost of capital, wages can\u2019t go up.\u2019 <\/em><\/p>\n

It\u2019s a hard spot to be in \u2014 but it seems clear that something has to give. Once again, the price of the metals<\/strong> has to go up or production will continue to dwindle as rising costs put these miners out of business. <\/p>\n

A New Bull Market Coming <\/h2>\n<\/p>\n

Mining is, of course, energy intensive. And the power industry has a political mandate to provide cheap power for people who can\u2019t afford it. So the mining industry <\/a>pays more for power but is also the first one to be interrupted. <\/p>\n

There have been no capacity upgrades in 12 years, Rick says. Meanwhile, demand keeps rising. Antiquated power plants struggle to keep up with demand. <\/p>\n

Not a promising picture for the most important supplier of mine production of platinum and palladium in the world. <\/p>\n

Then there is Zimbabwe. \u2018Which I can dismiss very quickly,\u2019<\/em> Rick said. \u2018Zimbabwe had a viable platinum and palladium industry 10 years ago. Robert Mugabe took care of that.\u2019<\/em><\/p>\n

The industry \u2018de-capitalized itself\u2019<\/em>, as Rick put. \u2018It can\u2019t be turned around in any reasonable amount of time with any reasonable amount of money.\u2019<\/em> Moreover, when Mugabe dies, the struggle to succeed him could well paralyse the country for years. <\/p>\n

\u2018I don\u2019t see Zim affecting platinum or palladium supplies for at least a decade,\u2019 Rick sums up. <\/em><\/p>\n

The final alternative is Russia. \u2018I believe it is getting better,\u2019 <\/em>Rick said, \u2018but it is getting better from a low starting point. The problem there isn\u2019t political, it\u2019s geological. The ore bodies of Norilsk, which are the biggest PGM ore bodies in the world, are 80 years old. They are long in the tooth, started by Stalin. And as you get deeper and deeper, the concentration of palladium declines.\u2019 <\/em><\/p>\n

Potentially, there is another deposit, but it is about 400 miles from Norilsk, which itself is in western Siberia and is fairly remote. Rick speculates that it will happen in 10 years and take billions of dollars. Short story: It\u2019s not going to happen anytime soon. <\/p>\n

As Rick says, this is not a resource story that\u2019s going to take place in two\u2013three years. It\u2019s a story that\u2019s already taken place over the last five\u2013six years. <\/p>\n

I asked about recycling. Rick told me that recycling makes up about 30% of supply. \u2018It is the only source of supply that has been growing,\u2019<\/em> he says. \u2018It has increased as a percentage of total supply by 50% in the last 10 years.\u2019 <\/em><\/p>\n

What about substitution? \u2018Substitution doesn\u2019t make sense at anything less than a 100% increase in price,\u2019<\/em> he guesses. <\/p>\n

And the demand scenario? Compelling. \u2018Platinum and palladium go out a tailpipe, go up a smokestack or get turned into jewelry \u2014 that\u2019s what happens to it,\u2019<\/em> Rick says. <\/p>\n

They are incredibly useful metals. \u2018The social trade-off is really platinum versus smog,\u2019 Rick says. \u2018I mean that\u2019s really what it\u2019s about. The air quality we enjoy today in Western Europe and North America and Japan is a function of catalytic conversion. It takes only about $200 of PGMs at today\u2019s prices to afford the air quality we all enjoy. And that\u2019s $200 against a median sticker price of $27,400 for a new car in the US. If the price doubled, the demand implication would be de minimis.\u2019<\/em> <\/p>\n

The emerging markets<\/a> are a big potential source of demand. China eclipsed the US as the largest auto market last year. But its use of platinum and palladium remains a small fraction of North American consumption. <\/p>\n

\u2018The price has to go up, and can go up,\u2019 <\/em>is the pithy summation Rick offers up. <\/p>\n

\u2018It\u2019s a thesis that is really, really difficult to poke holes in.\u2019<\/em> Unless the Western world goes off an economic cliff and vehicle sales get cut in half, it is hard to imagine anything less than a 50\u2013100% increase in price. <\/p>\n

As you can see, this is a thesis worth investigating further. <\/p>\n

Chris Mayer
\nContributing Editor, Money Morning<\/em> <\/strong><\/p>\n

Join Money Morning on Google+<\/u><\/a><\/strong>\n<\/p>\n

From the Archives…<\/strong><\/em><\/p>\n

Why Dividend Stocks May Not Stay This Cheap for Long<\/a>
\n29-03-2013 \u2013 Kris Sayce <\/p>\n

Respect the Market Trend, but Don\u2019t Expect it to Last<\/a>
\n28-03-2013 \u2013 Murray Dawes <\/p>\n

Silver \u2018$100 Within Two Years<\/a>\u2019
\n27-03-2013 \u2013 Dr. Alex Cowie <\/p>\n

11 Billion Reasons to Expect a 200% Move in Gold Stocks Within Months<\/a>
\n26-03-2013 \u2013 Dr. Alex Cowie <\/p>\n

You Want Proof the Stock Market\u2019s Heading Up? Try This…<\/a>
\n25-03-2013 \u2013 Kris Sayce<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au I was chatting with Rick Rule last Friday. Rick is now part of Sprott Asset Management, one of the most respected natural resource investors around. Rick also had a ridiculously good long-term track record in managing money before joining Sprott. Anyway, Rick has a new thesis he is hot on: platinum and palladium, … <\/p>\n

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